Fix & flips are one of the most popular methods for real estate investing. To me, it makes sense; seeing the before and after of a home is much more exciting than, say, wholesaling. You can probably understand why there aren’t many wholesaling reality tv shows but dozens of flipping shows.
So let’s say you’ve caught the flipping bug and want to try your hand at this method of real estate investing. The problem is, you have no idea how to get started or where to go. How can you flip a house when you have zero experience as a real estate investor?
That’s what this article is all about. I’ll show you the things you need to have ready to begin a successful fix & flip venture. Plus, I’ll show you my absolute favorite way to find properties and avoid bidding wars altogether. Ready? Let’s get to it.
Search for Off-Market Properties
While you’re free to compete with other real estate investors by bidding on houses listed on the MLS, I prefer to avoid it altogether by finding off-market properties. It may sound daunting (it isn’t) or like some well-kept secret (I guess it is) sourcing inventory that’s not publicly available is so worth the effort.
The easiest way I know how to do this is by what I like to call “Driving for Dollars.” To drive for dollars, all you need to do is go out into neighborhoods and look for properties that are in some state of disrepair.
That’s a bit of an oversimplification, as there’s a little more strategy involved. Let me break it down to give you a run over on what it takes to make a successful off-market real estate investment:
Look for homes that are in “middle” neighborhoods.
You don’t want to go into neighborhoods that will be difficult to convince a buyer to go for. That said, you also don’t want to go into neighborhoods that are too fancy or touristy. Those areas typically have vacation or second homes, and vacation homeowners are much more resistant to letting go of their summer home than a full-time owner-occupied situation.
Like Goldilocks, you need to find neighborhoods that are in between and just right. They should have good curb appeal overall, seem safe, and look like the other neighbors care.
“Disrepair” will be your new favorite word.
When I say “disrepair,” I don’t mean a house that’s ready to be condemned, though you could go that route if the ROI is there. I wouldn’t recommend it for new investors, though. Instead, look for homes that have, say, a few pieces of siding that are damaged or a lawn that looks unkempt.
Maybe the home’s exterior is a little outdated (and not in a kitschy, intentional way). These properties are your sweet spot as the signs of neglect usually mean there’s an owner who just can’t keep up with whatever needs to be done. There could be a myriad of reasons: job loss, elderly, vacancy, whatever. No matter the reason, it’s clear that this is an opportunity for you to take this burden off of their hands.
Reach out and then ask for referrals.
I have an excellent script I use, so check out the Driving for Dollars article linked above. My process is quick and has been designed so that if they say “no,” that’s not the end of the conversation.
Truth be told, you’ll hear “No” more often than “Yes!” It’s a numbers game, so the more you try, the more successful you’ll become. Rather than letting that “No” deter me, I utilize that to find potential new properties.
To do this, all you have to say is: “I understand. Do you know of anyone else who might be interested in selling their property?” That’s it! You’ll be surprised how many new referrals you can get by asking this simple question.
Be a problem solver, not a buyer.
Few homeowners will be interested in selling their house to some jerky real estate investor who insults them by saying their home looks like crap. To make the deal happen, you’re going to need to be open, friendly, and come at it as you taking this problem off of their hands. It’s almost like you’re doing them a favor by buying their home, even when a week ago they weren’t thinking of selling.
You may get a little emotionally invested when digging into their story; it happens. But since relationships close sales, it’s all for the best. Remember the human side of this: there’s someone in distress, and you’re here to remove that from their life. It just happens that distress is your new potential money maker.
To become successful at real estate investing, you’re going to need an arsenal of talented professionals behind you. Start networking with other investors in the area.
Don’t worry about getting the cold shoulder, as most real estate investors I’ve met have been nothing but friendly and helpful. Believe me, there are enough properties out there for all of us. All real estate investors started at zero and had to learn from others, so they’re keen to pay it forward.
Look for professionals who are experienced in fix & flips as a business venture, as the requirements you’ll have for your properties will be much different than someone looking for their new home.
Your network should include a:
- Real Estate Agent
- General Contractor
- Specialized Contractors (Electricians, Plumbers, etc.)
Don’t feel like you need these all from the get-go, as your professional network will increase over time. At the very least, start with a real estate agent and a lawyer experienced with real estate investing. These two pros will typically have their own network of resources that can help you figure out the rest.
Get Your Business Set Up
To successfully flip a house, you’ll need to become a business owner. Not only will lenders be looking for some sort of business plan, but putting a real estate investment under a business instead of your own name gives you a layer of liability protection should something go awry.
Many investors will open an LLC to handle their investments. Depending on the state, it can be a simple process or extremely complex. Let your attorney handle the majority of this so that you know everything is in order as it should be. There are other businesses structures like sole proprietorships and B, C, or S corporations, and they’ll have their pros and cons. You’ll need to decide which type of business structure will work best for your situation.
Whatever you do, don’t skip this part. If you’re serious about becoming an investor, you need to have your situation in order. It’s much easier to set up an LLC and let it sit than trying to form it after you’ve already bought and sold a property.
We help all of our borrowers get set up with an LLC before funding a deal.
Find a Lender
There are several ways you can get financing for your fix & flip. Deciding on which lender to work with will depend on a few factors:
How much do you need?
If you’re going for a full mortgage because you have nothing to put down, then you’ll need to go through a traditional lender like your bank or credit union. They’ll require a bunch of documents like employment history, credit report, and probably a business plan. While it’s a lot of hoops to jump through, once you establish a relationship with the lender and show a history of on-time payments, they’ll begin to loosen up a little.
If you have your own money but are a little short, consider using a hard money lender. Hard money loans bridge the gap between what you have and what you need. Their rules are much different than traditional lenders as they focus primarily on real estate investment deals. Because of this, they understand your situation better than a bank and can get you funding much faster. There are some caveats, though, so check out our guide to hard money lending.
What’s your credit like?
If your credit is only so-so, you’re going to have a difficult time finding a lender. You may need to put down a higher down payment or have a cosigner. It’s not impossible, though; you’ll just have a few more hoops to jump through.
Hard money lenders usually don’t focus on credit as much as a conventional lender. They work on collateral, with the collateral being your investment property. If you can’t pay back the loan, they’ll take possession of the home (which is usually a property with high profit potential), so a lower income or credit score is less consequential to them.
There’s also the option of using a private loan like borrowing from friends and family or bringing a partner into your business. You’ll have to weigh the pros and cons of each scenario because every business structure is unique.
Set a Hard Budget and Stick to It
Once you take ownership of the property, it can feel like you’ve got the keys to a potential palace. Budget creep can happen to any investor, so you’ll need to be disciplined with how much you’re willing to spend. I’ve seen budgets get blown out because there’s a new quartz countertop they saw on Pinterest that would be perfect or a sudden upgrade to a more expensive paint, you name it.
Of course, don’t be stingy; you’ve still got to make the home appealing enough that it’s an easy sale. But don’t let your ideas of what could overtake your finances.
Don’t Get Emotional
When it’s time to sell, don’t let your sweat equity get in the way of earning a profit. We’re currently in a seller’s market where the demand is higher than the supply, so you shouldn’t have any issue getting the price you think is fair.
But seller’s markets don’t last forever, and the last thing you want is to be left holding the bag. For your first investment, remember that a profit is a profit. If you’re in a buyer’s market where you have to compete for attention, don’t let your ego get in the way of a good sale. Crunch the numbers beforehand and come up with a number you absolutely won’t go below to ensure you’re coming out ahead on the deal. Consider that number your expectation for what you’ll receive; anything above that is gravy.
Once you get that first investment sold, you might feel like it’s time to expand your empire and will start chasing down any potential opportunity you see. I recommend only handling one investment at a time for the first while.
Successful investors take their time and don’t spread themselves too thin. In Q4 of 2020, fix & flip business owners reported having an average of only 1.18 houses on the market. Stay practical throughout your run as a real estate investor, and you’ll come out ahead.
Frequently Asked Questions
How Long Will it Take to Flip My Investment Property?
Selling a real estate investment property requires a number of variables to fall into line just so. The lifespan of a fix & flip goes like this:
- Find a property
- Negotiate the price
- Go through due diligence
- Get funding
- Fix the place up
- List it
- Receive bids
- Negotiate the price
- Have your buyer go through due diligence
- Your buyer gets funding
- You sell it
That’s not a quick process, even in the hottest of markets. The average time it takes to flip a home is 181 days, so you’ll need to find a way to keep your business solvent throughout those 6+ months. Could it go faster than that? Sure. But it can also take much longer, too. Plan for the worst, but hope for the best.
How Much Profit Can I Expect to Make Fixing & Flipping Houses?
This is a difficult question to answer, but one I get asked a lot. The profit you make depends on many factors:
- The price you paid
- The investments made
- How long you’ve held onto the property
- The location of the property
- How hot the market is
- The overhead of your business
And so on. Luckily for all of us, more intelligent people out there have looked at the data to give us a rough idea of what ROI you should aim for on your investment property. Check out this chart from Attom Data that shows the ROI and gross profit for real estate investments over the past 15+ years:
Finding your first fix & flip is always an exciting process because it’s so full of potential. Remember to take it slow and don’t take on more than you can handle. Follow the tips I’ve listed above, and you’ll be much further ahead on your journey than someone who isn’t prepared.